Liquidators – The cost of practice and remuneration update

This article will:

• Compare Liquidators’ current registration costs with the increased and new fees imposed by each of the Insolvency Law Reform Act 2016 (ILRA) and Government’s ASIC ‘user pays’ industry funding model;
• Consider recent remuneration cases and revisions to the remuneration regime under the Corporations Act 2001 (Corporations Act); and
• Set out suggested good remuneration practice protocols insolvency practitioners should employ to verify that their fees are deemed ‘reasonable’.

Registration costs, renewal and appointments

Following the passing of the ILRA, on 12 October 2016 the Government made available explanatory material and a draft suite of subordinate legislation. Key points include:

• The Corporations (Fees) Regulations 2001 are to be repealed and replaced with the Corporations (Fees) Amendment Regulations 2016;
• New Insolvency Practice Rules (Corporations) 2016 are introduced; and
• A new Schedule 2 Insolvency Practice Schedule (Corporations) will be inserted into the Corporations Act at the end of Part 5.9 (IPS). The IPS will amend, repeal, or replace various sections of the Corporations Act, including in relation to registration and remuneration.

Following the Financial System Inquiry and consultation process in August 2015, on 20 April 2016 the Government announced the introduction of an industry funding model for ASIC, whereby its costs of regulating each industry are recovered from the respective industry. A consultation paper was published in November 2016 inviting submissions. Additional public consultation will be held prior to introduction into Parliament.

ASIC’s position is that the model meets its design objectives – simple, certain, commercially based, allows efficient processing and proportionally reflects the cost of regulation. In addition to meeting the design objective, there was also a concern that a percentage of assets approach would increase the reporting and regulatory (supervisory) burden and is open to avoidance (e.g. financial incentive to reduce asset realisation).

However, regard should be had for the concerns around the fixed levy model, including those previously raised by ARITA who remains staunchly opposed to the model in its entirety based upon the following:-

• A ‘per appointment’ model is or may be anti-competitive by raising barriers to entry particularly for smaller operators or placing them at a disadvantage (practitioners who operate in the higher volume, lower margin market – often SMEs with little or no asset recovery);
• Insolvency practitioners already significantly subsidise ASIC;
• ASIC’s actual conduct ‘outcomes’ per year do not reflect the high cost of regulation claimed;
• If recovery of costs is required, Liquidators are not the proper beneficiaries of regulation; and
• There is little correlation between the number of appointments and the regulatory risk / oversight

Remuneration: – ‘reasonable’ – ‘necessary’ – ‘properly incurred’

Case update

In recent years, discourse has been rife traversing and seeking to reconcile the inconsistency between the approach to approval applications in different Australian state Courts.

Justices of the NSW Supreme Court have, until and including in decisions through to February 2016, delivered a series of judgments significantly reducing remuneration claimed, criticising the hourly rate method of charging fees (said to result in a “disproportionate expenditure of time”) and favouring a commission-based method calculated by reference to assets realised (said to “incentive the creation of value”). A percentage of 2-5% has variously been touted as the magic number.

We have previously reviewed these NSW decisions. See links here and here. Please note that Brereton J’s Sakr Nominees Case decision dealt with in our 12 July 2016 publication was appealed. The appeal was heard on 1 November 2016 but judgment has not yet been delivered.

Conversely, the VIC Supreme Court¹ has adopted the view that once the insolvency practitioner discharges the onus of establishing an entitlement to the amounts claimed (on an hourly rate basis), this is sufficient. No reference to a need for the remuneration claimed to reflect a designated, or any percentage of the assets realised. The Federal Court also endorsed that approach this year in approving the full amount of remuneration claimed. Smith J said that where the fees are found to be prima facie fair and reasonable, there was no reason to question the reasonableness of the work done or the rates.²

The industry nationally breathed a sigh of relief when in two NSW cases in August 2016:

• Robb J in the NSW Supreme Court declined to accept the creditors’ assertion that the remuneration should be limited to 2% of the assets realised. He said that to suggest the determination of remuneration involves the selection of a percentage “divorced from all of the other relevant circumstances..” is incorrect³; and
• Brereton J approved the Liquidators’ fees in full. Whilst mentioning that the fees claimed were “well within the range described in the cases”, His Honour said that both time and commission based costing were permitted if reasonable having regard to all of the section 473(10) factors. In that case, the Liquidators filed detailed summaries of the work done and to be done and deposed to those fees being reasonable and necessary.

Most recently on 17 November 2016, in determining if the remuneration claimed by the Liquidator was reasonable (by an expedited costs assessment process on the filing of affidavit material, pursuant to consent orders made), Judicial Registrar Hetyey noted that:

• The work to preserve the properties was reasonable and appropriate given their value;
• ARITA’s code specifies that work must be necessary and proper, but provides no guidance as to the level or rates that might be charged; and
• The rates charged appear to reflect current industry practice and are fair and reasonable given the size and complexity of the liquidation in question.⁴

The remuneration claimed, on an hourly fee basis was reduced to a small extent, on the basis that some of the work charged for could not be verified and/or was deemed not properly incurred, and therefore was not able to be deemed reasonable.

ILRA amendments to the Corporations Act & ARITA Code

Division 60 of the (draft) IPS repeals, amends or replaces the existing remuneration regime provided for in the Corporations Act. Section 473(10) and section 504(2) of the Corporations Act are replaced with sections 60-20 of the IPS which largely replicates the former wording, but for substituting the words “reasonably necessary” with the words “necessary and properly performed”, and removing the capping of remuneration as a factor.

Division 90 of the (draft) IPS deals with the review of the administration. This includes review by:

• The Court at its own initiative, the company, the practitioner, ASIC or a person with a financial interest in the administration; and
• Another registered liquidator appointed by the Court, ASIC, creditors or members (including consideration of whether remuneration is reasonable).

ARITA Code

Chapter 14 of the ARITA Code⁵ is headed ‘Necessary and Proper Remuneration’. In considering the reasonableness of remuneration claimed, Chapter 14 provides useful guidance:

• Practitioners may claim for work that may not have produced a positive result provided there was a proper exercise of professional judgment at the time (14.1).
• Before a decision is made to claim remuneration, the practitioner must ensure the work done was necessary and proper (14.1 & 14.2).
• Work done which took an inordinate amount of time is not proper (14.2).
• Prior approval of fees does not remove the obligation to establish that the work was necessary and properly performed (14.2).
• Practitioners must ensure that when time based charging, they ensure that the appropriate hourly rates are set for the administration. Factors that may require a variation to the application of standard rates are complexity, location of business operations, risk and the specialised nature of the Administration (if any) (14.7).

Final thoughts and suggested good practice protocols

Neither the existing or new ILRA legislation, nor the authorities provide any ‘hard and fast’ rules as to what is reasonable remuneration. It is a case-by-case exercise and insolvency practitioners must continue to employ professional judgment to ensure all work done is necessary and proper, and that the fees charged are having regard to all relevant factors, reasonable irrespective the fee method be applied. This will include, but not be governed by, proportionality (i.e. consideration of the appropriate work done and fees to be charged against the value of the expected assets to be realised).

Good practice remuneration protocols

To give themselves the best opportunity of obtaining approval for remuneration claimed (whether by creditors, the Court, or in the context of a review by another practitioner), insolvency practitioners should:

• Assess the appropriate hourly rates (and adapt accordingly if necessary) and/or consider an alternative method of charging on a case-by-case basis at the start of each job;
• Carefully review all time sheets before preparing a remuneration claim;
• Keep detailed records of not only work done, but why a particularly decision was made if that decision is likely to result in considerable cost;
• Adopt and require of staff good file management practices so that if the file is ever scrutinised, all time charged for can be objectively verified;
• Ensure the level of staff working on tasks is commensurate to the nature of the work; and
• Follow the ARITA Code remuneration report template when reporting to creditors and seeking approval for incurred or to be incurred fees (same template to follow when a report is prepared in support of a court application for approval).

This article was written by Chantal Reigo, Special Counsel and Grant Whatley, Partner in Sydney.

¹Re Traditional Values Management Ltd (in Liq) (No 4) [2016] VSC 520; referring to Thackray v Gunns Plantations Ltd [2011] VSC 380.

²Re Smith (in his capacity as former provisional liquidator of Australian Global Capital Pty Ltd (in Liq) [2016] FCA 644.

³David Lewis Clout in his capacity as Liquidator of Mainz Developments Pty Ltd (in Liq) [2016] NSWSC 1146.

⁴F. Basile & Associates Pty Ltd (in Liq) [2016] VSC 690.

⁵ARITA Code of Professional Practice, 3rd Edition, 1 January 2014.